The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
Should You Trade Stocks or Forex? | Trading Forex
The object of trading (no matter what type of trading it is) is to make as much money as possible. When looking for assets to trade, it often seems that most traders don’t give much thought to where they’ll have the best opportunity for profit. They don’t adequately evaluate whether stock trading or Forex trading is a better option, they tend to just make a decision randomly, and then pursue it. However, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your investment style and your financial goals – and perhaps to adjust your trading accordingly.
Why Trade Forex Instead of Stocks?
There are two ways to trade stocks. You can buy or sell actual stocks at a stockbroker, or you can trade CFDs (contracts for difference) based upon underlying stocks which tend to be the option offered by retail Forex and CFD brokers.
If you do not have at least $10,000 to deposit, then it will probably make economic sense to trade stocks using CFDs. However, the total spread plus commission charged on a Forex trade is hugely lower than the equivalent trade in an individual stock CFD. As I researched this topic, I checked the advertised spread at a well-known retail Forex brokerage for EUR/USD and a CFD based upon Glencore PLC, a publicly quoted company on the FTSE 100. The spread for EUR/USD represents about 0.02% of the instrument’s value, while the spread for Glencore represents 0.23% of its value. That is a large difference.
There is also the question of overnight financing at non-Islamic Forex or CFD Brokers. Typically, the interest charged in holding a Forex pair overnight might amount to about 3% of the position’s value if it were held for a period of one year. With stock shares, the interest charged is typically a little higher.
Lastly, it is important to consider that if you hold a CFD based upon a stock you generally will not receive any dividend payments that may be made if you were to take a similar stock position with a stockbroker.
There is no doubt that the costs of trading stock CFDs with retail brokers are significantly higher than the costs involved in trading Forex.
Forex vs. Stocks
It makes sense to trade something where the price is going to fluctuate by a lot. After all, you need the price of something to move significantly in order to make any profit buying and selling it! The easiest way to make money is by trading something where the price goes straight up or straight down, although of course it is rarely as simple as that.
In this respect, stock trading typically offers much better opportunities than major Forex currency pairs, no matter how well you understand Forex trading basics. In attempting to prove this I present a table showing the maximum annual absolute percentage value movements in the EUR/USD currency pair and the world’s greatest stock index, the S&P500 Index:
We can see that over the last decade, on average, the S&P500 Stock Index has moved almost double the range of the EUR/USD pair. Additionally, individual stocks can move much more than its Index will. So it is obvious that much more profit can be made when you trade stocks than in trading Forex, at least on an unleveraged basis.
Leverage
How much leverage can and should be used is a very important question for retail traders. Let’s start by looking at stock trading, taking the example of the U.S. Securities and Exchange Commission. If you are purchasing real stocks from a licensed broker, your maximum leverage at the end of the day you buy the stock is 2:1. You must put up at least half of the cost. If you are selling stocks short, the rules range from slightly over 3:1 to 1:1 depending upon the price of the stock. You will pay (at the time of this writing) something like an annualized interest rate of 8% on the leverage, meaning that the stock must move by at least 8% in value per year in order for the leverage to be worthwhile.
Of course, retail brokers offering CFDs that are based upon the price of the stock are far more generous with leverage, but generally the leverage they offer in Forex trading is even more generous. Typically, a Forex broker might offer a maximum leverage of 100:1 on Forex currency pairs, but only 20:1 on individual stocks. This means you can potentially profit five times as much on a Forex movement than you can on a stock movement, on a like for like basis.
The Difference Between the Forex and Stock Markets
If you are looking to hold trades for a long time, buying specially-picked stocks in line with the start of a strong bull market is probably the best profit you can get. However, if you can only afford a retail CFD broker, the cost of holding the position for a long time is likely to be considerable, and if you are over-leveraged, any strong adverse movements – which are common in stocks – could be frightening (and costly).
Forex tends to be less volatile, and less manipulated by high-frequency trading algorithms. Due to the lower cost of frequent trading and higher leverage, if you are going to be day-trading, it is arguably easier to day trade Forex than stocks. It should also be considered that there are no “short” positions in Forex, and short positions in stocks can be subject to restrictions. Forex markets are also open 24 hours per day during the week, unlike the stock market, and brokers often shut down their stock markets meaning you are stuck in a position with no effective stop loss overnight every night, if you hold a position that long.
Conclusion
If you have a lot of money, i.e. a large 5-figure amount in U.S. Dollars, and you have a long time horizon, you will probably be able to make maximal profit by buying real stocks through a stockbroker you could find in our stock broker reviews in a strong bull market. At this level, the commission/spread is much more reasonable because it is a fixed dollar amount.
If your account is much smaller and you are looking to trade on shorter time-frames or just to day trade, then you will probably have a better chance trading Forex through a broker you could find in our regulated forex broker reviews. However, if you have done research and really favour a few particular stocks in a bull market, you can probably benefit from short-term holdings of these stocks, but you should be very careful in your total exposure.
Source
Should You Trade Stocks or Forex? | Trading Forex
The object of trading (no matter what type of trading it is) is to make as much money as possible. When looking for assets to trade, it often seems that most traders don’t give much thought to where they’ll have the best opportunity for profit. They don’t adequately evaluate whether stock trading or Forex trading is a better option, they tend to just make a decision randomly, and then pursue it. However, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your investment style and your financial goals – and perhaps to adjust your trading accordingly.
Why Trade Forex Instead of Stocks?
There are two ways to trade stocks. You can buy or sell actual stocks at a stockbroker, or you can trade CFDs (contracts for difference) based upon underlying stocks which tend to be the option offered by retail Forex and CFD brokers.
If you do not have at least $10,000 to deposit, then it will probably make economic sense to trade stocks using CFDs. However, the total spread plus commission charged on a Forex trade is hugely lower than the equivalent trade in an individual stock CFD. As I researched this topic, I checked the advertised spread at a well-known retail Forex brokerage for EUR/USD and a CFD based upon Glencore PLC, a publicly quoted company on the FTSE 100. The spread for EUR/USD represents about 0.02% of the instrument’s value, while the spread for Glencore represents 0.23% of its value. That is a large difference.
There is also the question of overnight financing at non-Islamic Forex or CFD Brokers. Typically, the interest charged in holding a Forex pair overnight might amount to about 3% of the position’s value if it were held for a period of one year. With stock shares, the interest charged is typically a little higher.
Lastly, it is important to consider that if you hold a CFD based upon a stock you generally will not receive any dividend payments that may be made if you were to take a similar stock position with a stockbroker.
There is no doubt that the costs of trading stock CFDs with retail brokers are significantly higher than the costs involved in trading Forex.
Forex vs. Stocks
It makes sense to trade something where the price is going to fluctuate by a lot. After all, you need the price of something to move significantly in order to make any profit buying and selling it! The easiest way to make money is by trading something where the price goes straight up or straight down, although of course it is rarely as simple as that.
In this respect, stock trading typically offers much better opportunities than major Forex currency pairs, no matter how well you understand Forex trading basics. In attempting to prove this I present a table showing the maximum annual absolute percentage value movements in the EUR/USD currency pair and the world’s greatest stock index, the S&P500 Index:
We can see that over the last decade, on average, the S&P500 Stock Index has moved almost double the range of the EUR/USD pair. Additionally, individual stocks can move much more than its Index will. So it is obvious that much more profit can be made when you trade stocks than in trading Forex, at least on an unleveraged basis.
Leverage
How much leverage can and should be used is a very important question for retail traders. Let’s start by looking at stock trading, taking the example of the U.S. Securities and Exchange Commission. If you are purchasing real stocks from a licensed broker, your maximum leverage at the end of the day you buy the stock is 2:1. You must put up at least half of the cost. If you are selling stocks short, the rules range from slightly over 3:1 to 1:1 depending upon the price of the stock. You will pay (at the time of this writing) something like an annualized interest rate of 8% on the leverage, meaning that the stock must move by at least 8% in value per year in order for the leverage to be worthwhile.
Of course, retail brokers offering CFDs that are based upon the price of the stock are far more generous with leverage, but generally the leverage they offer in Forex trading is even more generous. Typically, a Forex broker might offer a maximum leverage of 100:1 on Forex currency pairs, but only 20:1 on individual stocks. This means you can potentially profit five times as much on a Forex movement than you can on a stock movement, on a like for like basis.
The Difference Between the Forex and Stock Markets
If you are looking to hold trades for a long time, buying specially-picked stocks in line with the start of a strong bull market is probably the best profit you can get. However, if you can only afford a retail CFD broker, the cost of holding the position for a long time is likely to be considerable, and if you are over-leveraged, any strong adverse movements – which are common in stocks – could be frightening (and costly).
Forex tends to be less volatile, and less manipulated by high-frequency trading algorithms. Due to the lower cost of frequent trading and higher leverage, if you are going to be day-trading, it is arguably easier to day trade Forex than stocks. It should also be considered that there are no “short” positions in Forex, and short positions in stocks can be subject to restrictions. Forex markets are also open 24 hours per day during the week, unlike the stock market, and brokers often shut down their stock markets meaning you are stuck in a position with no effective stop loss overnight every night, if you hold a position that long.
Conclusion
If you have a lot of money, i.e. a large 5-figure amount in U.S. Dollars, and you have a long time horizon, you will probably be able to make maximal profit by buying real stocks through a stockbroker you could find in our stock broker reviews in a strong bull market. At this level, the commission/spread is much more reasonable because it is a fixed dollar amount.
If your account is much smaller and you are looking to trade on shorter time-frames or just to day trade, then you will probably have a better chance trading Forex through a broker you could find in our regulated forex broker reviews. However, if you have done research and really favour a few particular stocks in a bull market, you can probably benefit from short-term holdings of these stocks, but you should be very careful in your total exposure.
Source
Should You Trade Stocks or Forex? | Trading Forex
The object of trading (no matter what type of trading it is) is to make as much money as possible. When looking for assets to trade, it often seems that most traders don’t give much thought to where they’ll have the best opportunity for profit. They don’t adequately evaluate whether stock trading or Forex trading is a better option, they tend to just make a decision randomly, and then pursue it. However, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your investment style and your financial goals – and perhaps to adjust your trading accordingly.
Why Trade Forex Instead of Stocks?
There are two ways to trade stocks. You can buy or sell actual stocks at a stockbroker, or you can trade CFDs (contracts for difference) based upon underlying stocks which tend to be the option offered by retail Forex and CFD brokers.
If you do not have at least $10,000 to deposit, then it will probably make economic sense to trade stocks using CFDs. However, the total spread plus commission charged on a Forex trade is hugely lower than the equivalent trade in an individual stock CFD. As I researched this topic, I checked the advertised spread at a well-known retail Forex brokerage for EUR/USD and a CFD based upon Glencore PLC, a publicly quoted company on the FTSE 100. The spread for EUR/USD represents about 0.02% of the instrument’s value, while the spread for Glencore represents 0.23% of its value. That is a large difference.
There is also the question of overnight financing at non-Islamic Forex or CFD Brokers. Typically, the interest charged in holding a Forex pair overnight might amount to about 3% of the position’s value if it were held for a period of one year. With stock shares, the interest charged is typically a little higher.
Lastly, it is important to consider that if you hold a CFD based upon a stock you generally will not receive any dividend payments that may be made if you were to take a similar stock position with a stockbroker.
There is no doubt that the costs of trading stock CFDs with retail brokers are significantly higher than the costs involved in trading Forex.
Forex vs. Stocks
It makes sense to trade something where the price is going to fluctuate by a lot. After all, you need the price of something to move significantly in order to make any profit buying and selling it! The easiest way to make money is by trading something where the price goes straight up or straight down, although of course it is rarely as simple as that.
In this respect, stock trading typically offers much better opportunities than major Forex currency pairs, no matter how well you understand Forex trading basics. In attempting to prove this I present a table showing the maximum annual absolute percentage value movements in the EUR/USD currency pair and the world’s greatest stock index, the S&P500 Index:
We can see that over the last decade, on average, the S&P500 Stock Index has moved almost double the range of the EUR/USD pair. Additionally, individual stocks can move much more than its Index will. So it is obvious that much more profit can be made when you trade stocks than in trading Forex, at least on an unleveraged basis.
Leverage
How much leverage can and should be used is a very important question for retail traders. Let’s start by looking at stock trading, taking the example of the U.S. Securities and Exchange Commission. If you are purchasing real stocks from a licensed broker, your maximum leverage at the end of the day you buy the stock is 2:1. You must put up at least half of the cost. If you are selling stocks short, the rules range from slightly over 3:1 to 1:1 depending upon the price of the stock. You will pay (at the time of this writing) something like an annualized interest rate of 8% on the leverage, meaning that the stock must move by at least 8% in value per year in order for the leverage to be worthwhile.
Of course, retail brokers offering CFDs that are based upon the price of the stock are far more generous with leverage, but generally the leverage they offer in Forex trading is even more generous. Typically, a Forex broker might offer a maximum leverage of 100:1 on Forex currency pairs, but only 20:1 on individual stocks. This means you can potentially profit five times as much on a Forex movement than you can on a stock movement, on a like for like basis.
The Difference Between the Forex and Stock Markets
If you are looking to hold trades for a long time, buying specially-picked stocks in line with the start of a strong bull market is probably the best profit you can get. However, if you can only afford a retail CFD broker, the cost of holding the position for a long time is likely to be considerable, and if you are over-leveraged, any strong adverse movements – which are common in stocks – could be frightening (and costly).
Forex tends to be less volatile, and less manipulated by high-frequency trading algorithms. Due to the lower cost of frequent trading and higher leverage, if you are going to be day-trading, it is arguably easier to day trade Forex than stocks. It should also be considered that there are no “short” positions in Forex, and short positions in stocks can be subject to restrictions. Forex markets are also open 24 hours per day during the week, unlike the stock market, and brokers often shut down their stock markets meaning you are stuck in a position with no effective stop loss overnight every night, if you hold a position that long.
Conclusion
If you have a lot of money, i.e. a large 5-figure amount in U.S. Dollars, and you have a long time horizon, you will probably be able to make maximal profit by buying real stocks through a stockbroker you could find in our stock broker reviews in a strong bull market. At this level, the commission/spread is much more reasonable because it is a fixed dollar amount.
If your account is much smaller and you are looking to trade on shorter time-frames or just to day trade, then you will probably have a better chance trading Forex through a broker you could find in our regulated forex broker reviews. However, if you have done research and really favour a few particular stocks in a bull market, you can probably benefit from short-term holdings of these stocks, but you should be very careful in your total exposure.
Source
Should You Trade Stocks or Forex? | Trading Forex
The object of trading (no matter what type of trading it is) is to make as much money as possible. When looking for assets to trade, it often seems that most traders don’t give much thought to where they’ll have the best opportunity for profit. They don’t adequately evaluate whether stock trading or Forex trading is a better option, they tend to just make a decision randomly, and then pursue it. However, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your investment style and your financial goals – and perhaps to adjust your trading accordingly.
Why Trade Forex Instead of Stocks?
There are two ways to trade stocks. You can buy or sell actual stocks at a stockbroker, or you can trade CFDs (contracts for difference) based upon underlying stocks which tend to be the option offered by retail Forex and CFD brokers.
If you do not have at least $10,000 to deposit, then it will probably make economic sense to trade stocks using CFDs. However, the total spread plus commission charged on a Forex trade is hugely lower than the equivalent trade in an individual stock CFD. As I researched this topic, I checked the advertised spread at a well-known retail Forex brokerage for EUR/USD and a CFD based upon Glencore PLC, a publicly quoted company on the FTSE 100. The spread for EUR/USD represents about 0.02% of the instrument’s value, while the spread for Glencore represents 0.23% of its value. That is a large difference.
There is also the question of overnight financing at non-Islamic Forex or CFD Brokers. Typically, the interest charged in holding a Forex pair overnight might amount to about 3% of the position’s value if it were held for a period of one year. With stock shares, the interest charged is typically a little higher.
Lastly, it is important to consider that if you hold a CFD based upon a stock you generally will not receive any dividend payments that may be made if you were to take a similar stock position with a stockbroker.
There is no doubt that the costs of trading stock CFDs with retail brokers are significantly higher than the costs involved in trading Forex.
Forex vs. Stocks
It makes sense to trade something where the price is going to fluctuate by a lot. After all, you need the price of something to move significantly in order to make any profit buying and selling it! The easiest way to make money is by trading something where the price goes straight up or straight down, although of course it is rarely as simple as that.
In this respect, stock trading typically offers much better opportunities than major Forex currency pairs, no matter how well you understand Forex trading basics. In attempting to prove this I present a table showing the maximum annual absolute percentage value movements in the EUR/USD currency pair and the world’s greatest stock index, the S&P500 Index:
We can see that over the last decade, on average, the S&P500 Stock Index has moved almost double the range of the EUR/USD pair. Additionally, individual stocks can move much more than its Index will. So it is obvious that much more profit can be made when you trade stocks than in trading Forex, at least on an unleveraged basis.
Leverage
How much leverage can and should be used is a very important question for retail traders. Let’s start by looking at stock trading, taking the example of the U.S. Securities and Exchange Commission. If you are purchasing real stocks from a licensed broker, your maximum leverage at the end of the day you buy the stock is 2:1. You must put up at least half of the cost. If you are selling stocks short, the rules range from slightly over 3:1 to 1:1 depending upon the price of the stock. You will pay (at the time of this writing) something like an annualized interest rate of 8% on the leverage, meaning that the stock must move by at least 8% in value per year in order for the leverage to be worthwhile.
Of course, retail brokers offering CFDs that are based upon the price of the stock are far more generous with leverage, but generally the leverage they offer in Forex trading is even more generous. Typically, a Forex broker might offer a maximum leverage of 100:1 on Forex currency pairs, but only 20:1 on individual stocks. This means you can potentially profit five times as much on a Forex movement than you can on a stock movement, on a like for like basis.
The Difference Between the Forex and Stock Markets
If you are looking to hold trades for a long time, buying specially-picked stocks in line with the start of a strong bull market is probably the best profit you can get. However, if you can only afford a retail CFD broker, the cost of holding the position for a long time is likely to be considerable, and if you are over-leveraged, any strong adverse movements – which are common in stocks – could be frightening (and costly).
Forex tends to be less volatile, and less manipulated by high-frequency trading algorithms. Due to the lower cost of frequent trading and higher leverage, if you are going to be day-trading, it is arguably easier to day trade Forex than stocks. It should also be considered that there are no “short” positions in Forex, and short positions in stocks can be subject to restrictions. Forex markets are also open 24 hours per day during the week, unlike the stock market, and brokers often shut down their stock markets meaning you are stuck in a position with no effective stop loss overnight every night, if you hold a position that long.
Conclusion
If you have a lot of money, i.e. a large 5-figure amount in U.S. Dollars, and you have a long time horizon, you will probably be able to make maximal profit by buying real stocks through a stockbroker you could find in our stock broker reviews in a strong bull market. At this level, the commission/spread is much more reasonable because it is a fixed dollar amount.
If your account is much smaller and you are looking to trade on shorter time-frames or just to day trade, then you will probably have a better chance trading Forex through a broker you could find in our regulated forex broker reviews. However, if you have done research and really favour a few particular stocks in a bull market, you can probably benefit from short-term holdings of these stocks, but you should be very careful in your total exposure.
Source
Should You Trade Stocks or Forex? | Trading Forex
The object of trading (no matter what type of trading it is) is to make as much money as possible. When looking for assets to trade, it often seems that most traders don’t give much thought to where they’ll have the best opportunity for profit. They don’t adequately evaluate whether stock trading or Forex trading is a better option, they tend to just make a decision randomly, and then pursue it. However, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your investment style and your financial goals – and perhaps to adjust your trading accordingly.
Why Trade Forex Instead of Stocks?
There are two ways to trade stocks. You can buy or sell actual stocks at a stockbroker, or you can trade CFDs (contracts for difference) based upon underlying stocks which tend to be the option offered by retail Forex and CFD brokers.
If you do not have at least $10,000 to deposit, then it will probably make economic sense to trade stocks using CFDs. However, the total spread plus commission charged on a Forex trade is hugely lower than the equivalent trade in an individual stock CFD. As I researched this topic, I checked the advertised spread at a well-known retail Forex brokerage for EUR/USD and a CFD based upon Glencore PLC, a publicly quoted company on the FTSE 100. The spread for EUR/USD represents about 0.02% of the instrument’s value, while the spread for Glencore represents 0.23% of its value. That is a large difference.
There is also the question of overnight financing at non-Islamic Forex or CFD Brokers. Typically, the interest charged in holding a Forex pair overnight might amount to about 3% of the position’s value if it were held for a period of one year. With stock shares, the interest charged is typically a little higher.
Lastly, it is important to consider that if you hold a CFD based upon a stock you generally will not receive any dividend payments that may be made if you were to take a similar stock position with a stockbroker.
There is no doubt that the costs of trading stock CFDs with retail brokers are significantly higher than the costs involved in trading Forex.
Forex vs. Stocks
It makes sense to trade something where the price is going to fluctuate by a lot. After all, you need the price of something to move significantly in order to make any profit buying and selling it! The easiest way to make money is by trading something where the price goes straight up or straight down, although of course it is rarely as simple as that.
In this respect, stock trading typically offers much better opportunities than major Forex currency pairs, no matter how well you understand Forex trading basics. In attempting to prove this I present a table showing the maximum annual absolute percentage value movements in the EUR/USD currency pair and the world’s greatest stock index, the S&P500 Index:
We can see that over the last decade, on average, the S&P500 Stock Index has moved almost double the range of the EUR/USD pair. Additionally, individual stocks can move much more than its Index will. So it is obvious that much more profit can be made when you trade stocks than in trading Forex, at least on an unleveraged basis.
Leverage
How much leverage can and should be used is a very important question for retail traders. Let’s start by looking at stock trading, taking the example of the U.S. Securities and Exchange Commission. If you are purchasing real stocks from a licensed broker, your maximum leverage at the end of the day you buy the stock is 2:1. You must put up at least half of the cost. If you are selling stocks short, the rules range from slightly over 3:1 to 1:1 depending upon the price of the stock. You will pay (at the time of this writing) something like an annualized interest rate of 8% on the leverage, meaning that the stock must move by at least 8% in value per year in order for the leverage to be worthwhile.
Of course, retail brokers offering CFDs that are based upon the price of the stock are far more generous with leverage, but generally the leverage they offer in Forex trading is even more generous. Typically, a Forex broker might offer a maximum leverage of 100:1 on Forex currency pairs, but only 20:1 on individual stocks. This means you can potentially profit five times as much on a Forex movement than you can on a stock movement, on a like for like basis.
The Difference Between the Forex and Stock Markets
If you are looking to hold trades for a long time, buying specially-picked stocks in line with the start of a strong bull market is probably the best profit you can get. However, if you can only afford a retail CFD broker, the cost of holding the position for a long time is likely to be considerable, and if you are over-leveraged, any strong adverse movements – which are common in stocks – could be frightening (and costly).
Forex tends to be less volatile, and less manipulated by high-frequency trading algorithms. Due to the lower cost of frequent trading and higher leverage, if you are going to be day-trading, it is arguably easier to day trade Forex than stocks. It should also be considered that there are no “short” positions in Forex, and short positions in stocks can be subject to restrictions. Forex markets are also open 24 hours per day during the week, unlike the stock market, and brokers often shut down their stock markets meaning you are stuck in a position with no effective stop loss overnight every night, if you hold a position that long.
Conclusion
If you have a lot of money, i.e. a large 5-figure amount in U.S. Dollars, and you have a long time horizon, you will probably be able to make maximal profit by buying real stocks through a stockbroker you could find in our stock broker reviews in a strong bull market. At this level, the commission/spread is much more reasonable because it is a fixed dollar amount.
If your account is much smaller and you are looking to trade on shorter time-frames or just to day trade, then you will probably have a better chance trading Forex through a broker you could find in our regulated forex broker reviews. However, if you have done research and really favour a few particular stocks in a bull market, you can probably benefit from short-term holdings of these stocks, but you should be very careful in your total exposure.
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